How to set up a private foundation

Find out how to set up a private foundation and make a difference.

How to set up a private foundation

A private foundation is a general term that includes operating, independent, and family foundations. These legal entities are permitted to make grants available from their charitable investments from single or multiple sources. This type of fund is managed by the foundation's self-appointed board of trustees.

Like public charities, a public foundation is classified as tax-exempt 501(c)(3). However, private foundations do not seek funding from the public. If you have won a large lottery jackpot and you want to do something philanthropic to change your community or benefit someone in particular, you may want to consider setting up a private foundation. Here's how.

The benefits of a private foundation

Setting up a private foundation has a number of advantages if you wish to start a nonprofit organization. These include:

  • Creating an extended legacy that lasts beyond your lifetime: You may have a very personal reason for starting a foundation. For example, you may have lost a loved one to an illness such as cancer, and you may want to use some of your wealth to fund medical research into that specific field of medicine. A private foundation can be a great way not only to help in this way but also to strengthen a family bond and help family members grieve or come to terms with a loss. Often, foundations are set up to carry on a family name or to honor the life of a family member who has passed.
  • Supporting other philanthropic organizations: Alternatively, you may wish to use your foundation to support other charitable organizations. In this case, you would create a "Friends of" organization. This type of organization, sometimes called a supporting organization, is specifically for supporting an organization overseas, such as Friends of the Louvre.
  • Giving you full control over grant-making: When you have a private foundation, you can allow family members to be employed as board members. This gives you complete control over how you allocate your resources so that you can ensure you are giving to a cause that matters to you.
  • Allowing flexibility with your approach to giving: Even with your family's help, a private foundation can be time-consuming to manage. If this is a concern for you, you may want to complement your private foundation with a donor-advised fund. Combining the two allows you to fulfill your philanthropic goals while also giving you greater flexibility and reducing administrative costs.
  • Ensuring access to tax benefits: Once you have registered your private foundation as a 501(c)(3), the IRS will recognize it as tax-exempt. This means your grantees can accept donations without having to pay taxes on them. Furthermore, donors, in most cases, can claim their contributions as tax deductible.

How to set up a private foundation

You've decided that you want to use some of your wealth to make a positive impact. Now you're ready to do so, there are some important steps you must take. Each one takes careful planning.

Define your mission statement

To be effective, your mission statement should be concise, easy to read, and memorable. To make sure you cover all your bases, ask yourself these questions:

  • Why are you starting your own private foundation?
  • Which cause does your foundation respond to?
  • How does it impact your chosen cause?

Pick a name for your private foundation

This may sound obvious, but it is important and sometimes gets overlooked among all the other details. Once you have chosen a name, you must make sure that it has not been taken in your state. You can do this by doing a business search on your Secretary of State Office website. Once you have a name that has not been taken, you must reserve it. You can file your foundation's name even if you're not yet ready with the rest of your paperwork. Select a name that is relevant to your cause and easily remembered.

File your foundation's articles of incorporation

The articles of incorporation provide the legal structure for your foundation.  You need it to apply for 501(c)(3) tax exemption with the IRS. It also secures the name of your foundation, limits your personal liability and that of your board members, and adds credibility to your foundation. You will need to include the following information:

  • The name of your private foundation
  • The purpose of your foundation
  • Where your nonprofit is located
  • The duration of your foundation
  • Your agent for all relevant legal matters
  • Details of the person filing the articles of incorporation
  • Names and contact details of all members of the board of directors

Make sure that you fill out the forms carefully; if you make mistakes or leave out information, this can delay your project. You can obtain templates for articles of incorporation online.

Apply for 501(c)(3) tax-exempt status

Technically, you don't have to file for 501(c)(3) status, but it is in the best interests of your foundation to do so. Once your foundation has this legal status, it will be entitled to special tax exemptions as a nonprofit organization. You must follow the IRS guidelines as they are laid out on their website.

Obtain a Federal Tax ID

All companies, even nonprofit organizations, are required to have an Employer Identification Number (EIN). Even though your foundation doesn't conduct business in the traditional sense, the IRS still considers it to be a business entity. You can apply for an (EIN) online at the IRS website.

Appoint a board of directors

The members of your board of directors are responsible for overseeing and organizing your foundation's operations. They should help you maintain the foundation's mission, strategy, and goals, as well as make sure that the foundation remains in compliance with ethical and legal standards. If you haven't already, you should also hire a lawyer.

How to amend articles of incorporation for a nonprofit

Things are apt to change, and there may come a time in which you want to amend your articles of incorporation. The best way to avoid complications should this arise down the road is to include an amendment procedure in your articles of incorporation. Make sure that you outline all the steps that you would need to take to make an amendment.

Getting professional help to set up your foundation

Finding and completing all the paperwork to set up a private foundation can be complicated and time-consuming, but you don't have to do it alone. There are professionals out there who are dedicated to this type of service. One of them is Greg McRay, Founder and CEO of the Foundation Group, Inc. In an exclusive interview with Lottery USA, Greg explained:

The primary benefit of using a professional service provider to help set up your private foundation is that they are experts in a complicated process. They know what you don't know.  They know all the forms and documents that have to be prepared and filed with both your state and the IRS, and they can help you do that.  But more importantly, they understand the pitfalls and problems associated with nonprofit compliance. As such, they can help you avoid the problems that plague many startups.

According to Greg, from start to finish, setting up a private foundation can take anywhere from three months to a year or so.  In particular, the amount of time it takes the IRS to review and approve an application for a new private foundation can vary greatly, with most applicants seeing approvals in about 3-6 months.

As for the fees, he adds:

Plan on budgeting between $5,000 - $8,000 if you are working with a professional company like Foundation Group.  That amount covers the cost of services, plus filing fees with the various agencies.  If you hire a law firm to help you, the fees will most likely be substantially higher.

Private Foundation FAQs

Here are some frequently asked questions about setting up a private foundation and the procedures that are involved.

Where should I share my articles of incorporation?

Once you have filed your articles of incorporation and they have been accepted, they will become public records.

If I change my foundation's name, do I need to change my articles of incorporation?

If you decide to change the name of your foundation, you will need to make an amendment to your articles of incorporation. To avoid this complication, it's better to choose a name that you will want to keep.

Who is the agent of process for my foundation's articles of incorporation?

This refers to the person who will receive and be responsible for all of the official documentation while your articles of incorporation are being processed.

How much will it cost to incorporate my foundation?

This will vary depending on the state you are in. Typically, incorporating a private foundation can cost between $50 and $200.

What is the lifecycle of a private foundation?

There is no fixed lifecycle for a private foundation. If you wish, your foundation can continue to run indefinitely. You may decide to allow future generations of your family or outside staff to continue to run and oversee its functions. Alternatively, you may choose to set up your foundation so that it spends down its assets over a fixed period of time.

Is there a required minimum size for a private foundation?

There are no size restrictions for the creation of a private foundation. However, due to the numerous costs involved in setting up and running a foundation, it is typically recommended that you start with a minimum investment of $1-2 million. However, it is possible to set up a private foundation with a smaller initial investment if you have the assets to add to it at a later time.

Must my private foundation distribute a minimum amount each year?

Your private foundation must make an annual distribution of a minimum of 5% of the fair market value of its investment assets to charitable causes.

Are there any rules that apply when making grants?

It is up to you and your board of directors to conduct due diligence on any grant applications that you receive. Your foundation must ensure that the request for funds is for a legitimate charitable purpose and that the applicant is a registered public charity. Special rules apply to overseas nonprofits, supporting organizations, and grants for scholarships. Should your private foundation wish to disburse a grant to any other type of organization, you must follow the regulations of Expenditure Responsibility - the IRS-mandated due diligence process.


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